X MANAGEMENT (4 UNITS) BUSINESS ACQUISITIONS: FINANCE & STRATEGY (Online)

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1 Page 1 X MANAGEMENT (4 UNITS) BUSINESS ACQUISITIONS: FINANCE & STRATEGY (Online) Instructor Information: Peter H. Lou Senior Manager of Portfolio Analysis & Modeling at Wealth Management Group, Wells Fargo Bank. Previously served as a senior finance manager at Union Bank of California and as a senior management consultant at Ernst & Young accounting firm. M.B.A. from University of Illinois at Urbana-Champaign. Advanced studies (master & doctoral programs; ) at University of Iowa. Chartered Financial Analyst (CFA) charterholder since University of California at Berkeley Extension Honored Instructor Contact Information peterlou_teaching@yahoo.com; peterlou.wellsfargo@gmail.com (Subject line: Business Acquisitions) Course Description: This course is for individual investors looking to acquire a small to mid-sized business, or corporate executives and professionals looking to expand their company's prospects via acquisitions. The course begins with the economics of investing in private equity, including liquidity of ownership shares, personal wealth concentration issues, passive versus active ownership, and expected returns. The acquisition process is covered extensively and includes sourcing acquisition leads and opportunities; evaluating industry strengths, risks, and regulations; and appraising a business in terms of financial potential. Due diligence topics include review of CPA financial statements, internal financial statements, tax returns; inventory count; and evaluating a seller's motivation for selling and other useful due diligence tools. An overview of valuation models include adjusting "reported cash flow" to normalized cash flow; historical price multiples by industry, size, or rate of growth; build versus buy analysis; and simple discounted cash flow models. Structuring topics include term sheets, stock versus asset sale, forming an acquisition LLC or corporation, structuring seller's consulting pay and earn-out, and creative offers and the final sale agreement. Financing options also are covered, including working with individual partners, banks, mezzanine lenders, venture capitalists, and private equity groups. Students leave the course with an understanding of how to put together a deal, how to minimize overpaying, and how to increase their chances of success in a business acquisition. Course Objectives

2 Page 2 The four fundamental course objectives are to (1) gain an overview of strategic issues driving business acquisitions, (2) understand the business acquisition process, (3) gain an overview of potential funding sources to complete a business acquisition, and (4) gain an understanding of post-closing integration issues. Understanding the business acquisition process includes defining attributes of a good target, identifying potential targets, estimating a target s value in the marketplace, preparing a confidentiality agreement or non-disclosure agreement, preparing a due diligence data request list, preparing a letter of intent, and comprehending critical elements of the stock/asset purchase agreement. The course will focus on thinking, understanding, analyzing, and presenting findings and conclusions based on developing analytical skills for use in a multitude of corporate and personal business acquisition settings. Although the course will touch on the selling of concepts, objectivity and intellectual integrity will be stressed and challenged (via online discussion forums). Required Textbook: 1). Business Acquisitions Course Reader: this will be uploaded to the course website on a weekly basis. 2). Harvard Business School Case Studies: Please order the cases from Harvard website listed below. Option #1: ENG&referral=00103 Option #2: Case 1: HBS Note on Corporate Strategy. Case 2: HBS Cash Flow and the Time Value of Money Case 3: HBS Technical Note on LBO Valuation (A) Case 4: HBS Between a Rock and a Hard Place: Valuation and Distribution in Private Equity. Case 5: HBS : Valuing a Business Acquisition Opportunity

3 Page 3 Case 6: HBS Corporate Valuation and Market Multiples. Case 7: HBS M&A Legal Context: Basic Framework for Corporate Governance Case 8: HBS # : Cisco Systems: Acquisition Integration for Manufacturing (Part A) Other Reference Books (recommended but not required) White, Sohndi and Fried: The Analysis of and Use of Financial Statements, Wiley. Weston, Chung and Siu: Takeovers, Restructuring and Corporate Governance (Second Edition), Prentice Hall. Gilson and Black, The Law and Finance of Corporate Acquisitions (Second Edition), Foundation Press. BenDaniel and Rosenbloom, International M&A, Joint Ventures & Beyond (First Edition), John Wiley & Sons. Reed and Lajoux, The Art of M&A (Third Edition) McGraw Hill. Benjamin Graham: Security Analysis Calculator or MS-Excel Requirements You need to have a financial calculator by the second week. You can use any financial calculator as long as it has all the functions we use in class, including PV, FV, cash flow calculations (models: HP10B, HP 12C, HP 17B, TI BA II, etc.). Alternatively, you need to have access to a PC with MS-Excel spreadsheet applications. Class Expectations Class participation is important and can favorably affect your grade. Minimum acceptable participation is regular participations in online discussions and completion of the specific assignments, including the midterm and final exams. Selected problems will be assigned each week. Course Procedure You will have assigned reading to be done prior to each class. Between classes you will practice on the selected assignments and questions. You will also be expected to complete the midterm & the final exams as well as the research project. Course Evaluations & Grading Policy The Exam will be combinations of multiple choice and essay questions and problems. Exam / Participation / Individual Weight Grade Tentative Range Research Project / Harvard Cases Class Participation / Online Forum 10% A 92 or above Harvard Case Studies (2 cases) 30% A M&A Research Project 30% B Final Exam (Comprehensive) 30% B Total 100% B C C C D / F 55 65; Below 55

4 Page 4 Teaching Style Lectures, discussion, problem solving, homework assignments, individual project. Incompletes: The interim grade Incomplete may be assigned when a student's work is of passing quality, but a small portion of the course requirements is incomplete for good cause (e.g. illness or other serious problem). It is the student s responsibility to discuss with the instructor the possibility of receiving an I grade as opposed to a non-passing grade. The student is entitled to replace this grade by a passing grade and to receive unit credit provided they complete the remaining coursework satisfactorily, under the supervision of and in a time frame determined by the instructor in charge, but in no case later than the end of the next academic quarter. At that time, the Registrar will cause all remaining Incompletes to lapse to the grade "F". Note: Receiving an I does not entitle a student to retake all or any part of the course at a later date. Student Behavior involving cheating, copying other s work, and plagiarism is not tolerated and will result in disciplinary action. Students are responsible for being familiar with the information on Student Conduct in the General Information Section of the UCLA Extension Catalog or on the website at

5 Page 5 Week 1 Week 2 Week 3 Course Outline & Reading Assignments Topic Introduction to Business Acquisitions A. A look back at economic history. B s financial collapse cheap, easy credit; deregulation; the new paradigm isn t so new, after all (back to the fundamentals). C. Behavioral Finance Don t forget the human factor Rationales for Business Acquisitions A. Acquisition rationale: i. Looking for growth through horizontal acquisitions. Product line acquisitions Pick off competitors Geographical expansion ii. Grow vertically move up the food chain: Acquire suppliers, distributors, customers Take out the middle man Rationalize your own process B. The M&A Fundamental Process Time Value of Money; LBOs and Private Equity A. LBOs & Private Equity i. What is a leveraged buyout? ii. How does an LBO Partnership differ from a Private Equity Partnership? iii. Does such an investment increase your business risk? iv. What is meant by systemic risk? v. Maintaining purchasing power parity? vi. Is such an investment easy to sell when I m ready? Liquidity risk? B. Valuation Methodologies i. Time Value of Money or DCF ii. Comparable Company Analysis iii. Comparable Transaction Comparisons Week 4 Valuing Business Acquisitions (Part 1) A. Mix of art and science B. Not perfect or precise (the Excel or Modeling Effect ) C. How do we factor in systemic risk? D. What about behavioral economics: irrational exuberance, Extraordinary Popular Delusions and the Madness of Crowds, good ole Bernie, a new paradigm. E. What are a few key non-number areas to focus on: i. Quality of earnings ii. Strength of the business model iii. Historical performance iv. Industry trends, v. Nature, stability, and trends in commodity markets vi. General level of interest rates, and long term expectations thereof vii. Inflationary expectation Readings See reading materials on the course website HBS Note on Corporate Strategy. Additional reading materials on the website HBS Cash Flow and the Time Value of Money HBS Technical Note on LBO Valuation (A) HBS Between a Rock and a Hard Place: Valuation and Distribution in Private Equity Additional reading materials on the website HBS : Valuing a Business Acquisition Opportunity HBS Corporate Valuation and Market Multiples. Additional reading materials on the website

6 Page 6 Week 5 Week 6 Week 7 Week 8 Week 9 viii. Competitive environment Valuing Business Acquisitions (Part 2): ; Accounting & Legal Issues A. Accountings issues i. Why can t we just add the two balance sheets together? ii. If we can t, how do we affix a value to what we re acquiring? B. The legal context Non-Disclosure Agreement (NDA) & Due Diligence A. Purpose for and typical language of NDA. B. Identify and understand the key elements of a due diligence investigation i. What s due diligence? ii. Why do we do it? iii. What are we looking for? iv. What kinds of data and documents do we request? v. What do we do with it when it arrives? C. Bring the acquisition process to a decision point Acquisition Financing A. Internally generated cash; target s cash; assumption of target liabilities B. The acquisition financing cocktail: i. Public or private financing? ii. Swap stock iii. Pony up cash iv. Borrow short-term from the bank v. Borrow long-term from investors vi. Sell stock to the public to the cash requirement vii. Any combination or permutation of the above? Documentation & Stock Purchase Agreement A. Am I buying the target s stock or just the assets? B. What s a Stock (Asset) Purchase Agreement? i. What are the key sections? Definitions, definitions, definitions Price and terms Reps and warranties; Covenants Conditions precedent to closing Indemnification; Termination; Miscellaneous ii. What other important terms should I understand and be aware of? Business Integration: A. What does integration mean? B. The Hardest Part C. Managing the strategic dynamics of acquisition Integration Week 10 Final Take-home Exam All above Arlette Wilson: Revised Accounting For Business Combinations. Deloitte Accounting for Business Combinations and Related Topics. HBS M&A Legal Context: Basic Framework for Corporate Governance. Additional materials on the website Reading materials on the course website Reading materials on the course website Reading materials on the course website HBS # : Cisco Systems: Acquisition Integration for Manufacturing (Part A) Reading materials on the website

7 Page 7 About the Harvard Business Cases Each student is required to choose to two Harvard cases for in-dive analysis. You can choose any cases that meet your personal & professional interests. Note that the emphases are on: Developing analytical and judgment skills Gain exposures to dynamic organizational and managerial situations Enhance your skills to analyze and defend your opinion as new information or perspectives become available. Incorporate computer modeling techniques (e.g. Macro, what-if analysis, business charting) and Excel spreadsheets where appropriate. What to Expect in a Case: Critical issues are not explicit. Information may be incomplete or ambiguous. Some information may be redundant / irrelevant. There are no correct or wrong answers as long as you can justify / substantiate your positions. Sample Guidance (for illustration purpose): Provide a business report (about 8-10 pages, including cover page, Table of Contents, Reference; graduate school-level quality) that includes: Overview: the issues / business case; the parties involved. Proposed solutions: Strength analysis. Proposed solutions: Potential risks involved in this credit derivative deal. Critique / evaluate on the proposed talk points to clients. Develop a set of recommendations supported by your analysis. Evaluate alternative proposals (pros and cons). Address the implementation issues in an applied corporate setting. Provide some analysis of the bond features in Exhibit 1, e.g. coupon frequency, discount vs. premium bond, etc. Concluding remarks; Reference. M&A ANALYSIS PROJECT (Individual Research Project) 1). Each student should select a single company with easily accessible public information concerning its financial statements as well as information on its business overviews, financial statements, common stock, bonds. 2). Assume that you have been assigned the task of marketing a target company to potential acquirers. You should develop a business report that includes the following information: Executive Summary: state the valuation method(s) used in your analysis of

8 Page 8 the company, how you resolved differences (if any) between the value estimates obtained using each of the different methods, and state a final value for the company on an aggregate and per share basis (i.e. total worth and EPS). Assessment of external environment including forecasts for the general economic conditions, industry analysis and competitive analysis, and company prospects over the next 5 years. Provide an overview of the competitiveness of the company relative to its industry peers at the current time. Identify a list of potential buyers and identify rationale(s) for the firm s acquisition by a potential buyer. Include a list of attractive features for the target company that makes it a valuable takeover target. Perform a valuation of the company, utilizing analytical methods deemed appropriate; use assumptions and forecasts that would be needed to assign a value to the firm. Identify a list of potential buyers and a brief rationale for the proposed fit between buyer and seller. 3). Prepare a typed group report (< = 15 pages) including all of the items listed above. Summarize and organize your data so that it is easy to follow. 4). The final deliverables (Harvard cases and research project) are due at the end of the 10 th session, the same time you turn in the final take-home exam. Please see the course website for sample deliverable for format. Reference: